2022 (2) TMI 1412 - AT - Insolvency and Bankruptcy

Violation of principles of natural justice - impugned order passed without consideration of any of the submissions made by the CoC or the Administrator and contrary to the express provisions of law - Erroneous presumption that National Housing Bank(NHB) is the owner of DHFL's funds or property by Section 16B of the National Housing Bank Act, 1987 (NHB Act) despite that the CoC had made elaborate and detailed submissions before the NCLT. Whether the Adjudicating Authority erred in holding that NHB is entitled to any rights under section 16 B of the NHB Act after commencement of CIRP against the DHFL when such rights are in direct conflict with the express provisions of the Code? - Is the relationship between DHFL and NHB that of a debtor and creditor, and no special rights can be afforded to NHB other than as a financial creditor? - Whether the Adjudicating Authority erred in holding that the Tagged Receivables are 3rd party assets? HELD THAT - The provisions of Section 16B of the NHB Act unequivocally provide that any sums received by the borrowing institution would be received by such borrowing institution in trust for RespondentNo.1, NHB, and would be accordingly, required to be paid to the Respondent, NHB. In the present case, both the factors stated in Section 16B are satisfied viz. the amounts held in trust by the Corporate Debtor (i) are to the extent of the accommodation granted by this Respondent; and (ii) are remaining outstanding. Accordingly, these are bound to be paid to this Respondent NHB in the plain and unambiguous terms of Section 16B of the National Housing Bank Act - Under Section 16B of the NHB Act, the Corporate Debtor is statutorily deemed to hold these funds as a 'Trustee' for this Respondent NHB. Although it is elementary and a matter of the first principle that a Trustee never has the Trust property for its use or purpose, such funds can be used solely for the Trust, i.e. only to be paid to this Respondent. In the instant case, being a refinance transaction, the Corporate Debtor availed refinance against a pool of tagged loans. Towards these tagged loans, Respondent NHB had already passed on the consideration in the form of refinancing to the Corporate Debtor. Under a clear mandate of Section 16 B(1) of the NHB Act, any realization from the said loans shall be deemed to be held by the Corporate Debtor in trust for the benefit of the refinancing institution, i.e. the Respondent NHB - the Corporate Debtor cannot use these tagged loans or recoveries for its purposes or uses or treat them as its property, disregarding the statutory Provision under Section 16B of the NHB Act. Thus, the realisations under the tagged loans and securities held thereunder are held by the Corporate Debtor only as an intermediary/custodian in trust for the benefit of the Respondent NHB, as it has refinanced these tagged loans. These amounts are required to be paid to this Respondent NHB. The Corporate Debtor cannot use these realisations for its benefits as if it is the owner of the same when it has availed refinance against these very tagged loans. Ultimately repayments under the loans belong to this Respondent NHB and not the Corporate Debtor. The Corporate Debtor is bound to act as per the mandate of the NHB Act - The actions of the Administrator, who was vested with the management of the Corporate Debtor, cannot be in contravention of the mandate given under clause (e), sub- section (2) of Section 17 of the Code, which envisages that the Administrator will be responsible for complying with the requirements under any law for the time being in force on behalf of the Corporate Debtor and thereby jeopardize the right and entitlement of Respondent NHB or act contrary to the provisions of Section 16 B of the NHB Act. While dealing with the issue of fixed deposit holders and public deposit holders, it is decided that Insolvency and Bankruptcy Code, 2016 overrides the provisions of the National Housing Bank Act, National Housing Bank directions and the RBI Act. No full payment right exists under the NHB, the RBI Act, or subordinate legislation. Even if it exists, any such right would be wholly repugnant to the provisions of the Code, which provides for a specific manner in priority of payment and sets out the right. The minimum amount a creditor is mandatorily required to be paid in the resolution plan, i.e. the liquidation value - It is also held that section 238 of the IB code overrides the RBI and NHB Act. Therefore the approved resolution plan that stipulates extinguishment of the claims to the FD s without discharging their payments in full is valid and legal under the Code. NHB is a development financial institution. It is lending to housing finance institutions. Exposure is not on purely commercial lines like any other commercial bank. NHB is an integral partner in formulating and implementing India's Government's housing and housing finance policies. For example, the exposure norms of RBI applicable to a commercial bank are not relevant to refinance a portfolio of a refinancing institution like NHB - If NHB were to be treated at par with any other financial creditors/commercial lenders, hypothetically, any CIRP against a Housing Finance Companies who had borrowed amounts totalling to NHB's net-worth would lead to a situation where NHB may be forced into liquidation, as it could then legally result in the entire net-worth of NHB being extinguished. This is not and could never have been the legislative intent. Equating NHB with other financial creditors when the statute places it in a special category of institutions would be a misplaced conclusion and must be avoided. NHB is serving as a development finance institution for the growth of the housing sector in the country. In view of the larger objective behind setting up NHB, it cannot be equated with other Financial Creditors. Hence, NHB is a sui generis financial creditor with vested statutory rights. This unique mandate of the statute must be respected. Section 16B of the NHB Act provides certain rights to NHB in clear, unambiguous terms, then assuming/suggesting the contrary is a fallacious proposition. There is no conflict, as has been explained already. There is absolutely no inconsistency since the Rule 10 exception applies to sums/assets held in trust under Sec. 16B of the NHB Act for the benefit of NHB, excluding such funds from the moratorium provisions of S. 14 of the Act and Rule 5 of the FSP Rules - Whereas exclusion for section 16B funds and assets has already been provided, starting from the sanction letters to the charge creating documents under which the banks and other lenders are claiming rights. In these circumstances, the argument that the rights of NHB under Section 16B are subject to the charge of other lenders is misconceived. It is pertinent to mention that in the instant case, funds with the corporate debtor to the extent they relate to the flag loans refinanced by the NHB are clearly impressed with the trust and are held in trust for the benefit of NHB. The DHFL is not the owner of the property, but the property is held in trust. Therefore, Section 238 of the Code is not applicable for the 3rd party assets. The relationship between the DHFL and NHB is not only that of a debtor and creditor. But the NHB has special rights under Section 16 B of the NHB Act, and these rights are not in conflict with the express provisions of the Code. Therefore Adjudicating Authority has not erred in giving the said findings. Accordingly, there are no reason for interference in the impugned order. Appeal dismissed.

Summary

Issues Involved:
1. Whether the Adjudicating Authority erred in holding that NHB is entitled to any rights under section 16B of the NHB Act after the commencement of CIRP against DHFL when such rights are in direct conflict with the express provisions of the Code.
2. Is the relationship between DHFL and NHB that of a debtor and creditor, and no special rights can be afforded to NHB other than as a financial creditor?
3. Whether the Adjudicating Authority erred in holding that the Tagged Receivables are third-party assets.

Detailed Analysis:

1. Entitlement of NHB under Section 16B of the NHB Act Post-CIRP Commencement:
The Tribunal held that Section 16B of the NHB Act unequivocally provides that any sums received by the borrowing institution in repayment or realization of loans and advances financed or refinanced either wholly or partly by the National Housing Bank shall be deemed to have been received by the borrowing institution in trust for the National Housing Bank. Such sums must be paid by the borrowing institution to the National Housing Bank. The funds with the Corporate Debtor, to the extent they relate to the earmarked/flagged loans refinanced by NHB, are impressed with a trust and are held "in trust" for NHB's benefit. The Corporate Debtor cannot use these tagged loans or recoveries for its purposes or treat them as its property, disregarding the statutory provision under Section 16B of the NHB Act. Therefore, these amounts are required to be paid to NHB, and the Corporate Debtor is bound to act as per the mandate of the NHB Act.

2. Relationship Between DHFL and NHB:
The Tribunal observed that the relationship between DHFL and NHB is not merely that of a debtor and creditor. NHB is a development financial institution lending to housing finance institutions, and its exposure is not purely on commercial lines like any other commercial bank. NHB is an integral partner in formulating and implementing India's housing and housing finance policies. Section 16B of the NHB Act creates a statutory trust over the tagged receivables, and these rights are not in conflict with the express provisions of the Code. The Tribunal emphasized that equating NHB with other financial creditors when the statute places it in a special category of institutions would be a misplaced conclusion.

3. Tagged Receivables as Third-Party Assets:
The Tribunal clarified that the funds with the Corporate Debtor to the extent they relate to the flagged loans refinanced by NHB are impressed with a trust and are held in trust for the benefit of NHB. These are third-party assets, i.e., they belong to NHB, and the Corporate Debtor was collecting the same from its owners in trust for NHB. The Corporate Debtor cannot use these realizations for its benefits as if it is the owner of the same when it has availed refinance against these very tagged loans. The Tribunal also referred to the judgment of the Hon’ble Supreme Court in the case of Municipal Corporation of Greater Mumbai vs. Abhilash Lal, where it was held that Section 238 of the Code could be of importance when the properties and assets are of a debtor and not when a third party like MCGM is involved. Similarly, in the present case, the tagged receivables are third-party assets held in trust for NHB, and Section 238 of the Code is not applicable.

Conclusion:
The Tribunal concluded that the relationship between DHFL and NHB is not merely that of a debtor and creditor, and NHB has special rights under Section 16B of the NHB Act. These rights are not in conflict with the express provisions of the Code. The tagged receivables are third-party assets held in trust for NHB. The appeal was dismissed, and the impugned order of the Adjudicating Authority was upheld.